German 10-Year Bunds Drop on Greek GDP as Italy Sells Bills

Aug. 13 (Bloomberg) -- German 10-year bunds declined after
a report showed that Greece’s economy contracted at a slower
pace in the second quarter and Italy reached its 8 billion euros
($9.9 billion) maximum target at an auction of one-year bills.

Two-year note yields rose the most in more than a week as
data showed Greek gross domestic product shrank 6.2 percent from
a year earlier, after dropping 6.5 percent in the previous three
months. Italian bonds outperformed bunds as investors bid for
1.69 times the amount of bills sold, up from a so-called bid-to-cover ratio of 1.55 last month. Bunds pared declines after
Handelsblatt newspaper reported a complaint filed with the
Constitutional Court may delay its ruling on the euro region’s
permanent financial backstop.

“The Italian auction was slightly better in terms of bid
to cover than the most recent,” said Marius Daheim, a senior
fixed-income strategist at Bayerische Landesbank in Munich.
“Both factors played a role, but the Greek GDP was the major
driver. I suspect this down-move will be a short-lived.”

Germany’s 10-year bund yield rose two basis points, or 0.02
percentage point, to 1.40 percent at 4:51 p.m. London time,
after dropping four basis points last week. The 1.75 percent
bond due July 2022 fell 0.16, or 1.60 euros per 1,000-euro face
amount, to 103.185. The nation’s two-year note yield climbed
three basis points to minus 0.047 percent. It reached minus
0.038 percent, the biggest intraday advance since Aug. 3.

Coene Comments

Spanish and Italian two-year notes fell for a fifth day
after European Central Bank policy maker Luc Coene said a plan
to buy the shorter-dated securities won’t solve the nations’
difficulties maintaining investor confidence.

Bond yields have climbed because financial markets don’t
trust Spanish and Italian authorities to take the measures
necessary to repair their economies, Coene said in an interview
with De Tijd and L’Echo published on Aug. 11. As a result, he
predicted few benefits from any ECB action.

German bonds returned 3.6 percent this year through Aug.
10, according to indexes compiled by Bloomberg and the European
Federation of Financial Analysts Societies. Italy’s debt earned
9.3 percent, French securities made 8.4 percent, while Spanish
bonds lost 4.6 percent, the indexes showed.

Negative Yield

Germany sold six-month bills at an average yield of minus
0.05 percent today, the lowest rate at a sale since Bloomberg
began collecting the data in 2000. A rate below zero means
investors who hold the debt to maturity will receive less than
they paid to buy it.

The nation’s debt sales next year will be little changed
from 2012, a draft budget shows. The federal government aims to
sell 253.8 billion euros in bonds and bills in 2013 after 254.5
billion euros this year, according to the Credit Finance Plan, a
debt-sale projection obtained by Bloomberg News.

Volatility on Israel’s bonds was the highest in developed
markets today, followed by those of Spain and Belgium, according
to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.